Weekend Reading for Financial Planners (Mar 9-10)

Executive Summary

Enjoy the current installment of "weekend reading for financial planners" – this week’s issue starts off with a look at how financial planning may be different by 2023 (and the trends driving those changes), from the rise of Gen X and Gen Y to the impact of technology as computing power continues to grow exponentially.

From there, we have a few practice management articles, including a look at how LPL’s NestWise financial planning offering for the middle market is beginning to gain momentum, a review of useful technology tools and apps for financial planners from a panel at the Technology Tools for Today (T3) conference, and a review of the recent 2013 Investment News Advisor Technology Survey.

In additon, there are a couple of more technical financial planning articles this week, including a preview of how health insurance will work for clients beginning in 2014, how estate planning trust strategies are shifting given the permanence of higher estate tax exemptions and portability, some guidance about how to debunk questionable investment sales pitches that may come to your clients, and an overview of the increasingly popular risk parity funds.

There are also a pair of articles tying to psychology and behavioral research for planners: the first finds that perhaps the perceived differences in risk tolerance between men and women are actually just a myth (or at least, can be explained by their personal and financial circumstances, not any biological difference in risk aversion); and the second article provides some guidance about how we can help clients de-stress their financial decision-making process.

We wrap up with two much lighter articles: the first is by Vivek Wadhwa and explains how, despite having no journalism degree, never taking writing classes, and nearly failing English in grade school, he became such a prolific business writer (and you can, too!); and the last article highlights 10 things that really amazing employees do, which can either be a suggestion for how to better succeed if you are an employee, or what to look for and better reward if you are a boss/owner/employer. Enjoy the reading!

(Editor’s Note: Want to see what I’m reading through the week that didn’t make the cut? Due to popular request, I’ve started a Tumblr page to highlight a longerlist of articles that I scan each week that might be of interest.You can follow the Tumblr page here.)

Weekend reading for March 9th/10th:

Planning 2023: 12 Trends to Watch – This cover story from Financial Planning magazine takes a look at 12 big industry-shaping trends to watch over the next decade. Major demographic trends include the rise of Gen X and Gen Y as a focal point for new clients and growth (due in no small part to the $18 trillion of wealth that will soon transfer to them), and the potential accessibility of financial planning through online technology as Moore’s Law continues to double the speed of processors every two years at half the price, ultimately leading to almost every industry becoming increasingly software-based. This technology explosion can have other significant ancillary effects as well, from curing many diseases (changing client life expectancy), to massive open online courses providing low-cost or free education to anyone who wants it, eliminating the burdensome costs of college. Notwithstanding all of these trends, it doesn’t necessarily mean that financial planning will be less successful or profitable; a growing wealth pie for all creates many opportunities, and some predict that Gen X and Gen Y may be even more receptive to ongoing relationships and bundled services.

NestWise Is Starting To Take Shape And Take Flight Under LPL’s Wing – This RIABiz article provides a nice summary of LPL’s NestWise – formerly known as Veritat before LPL acquired the company – which is seeking to bring more financial planning to the middle market, built primarily around an ongoing retainer model (similar to the one described on this blog earlier this week). So far NestWise has signed on 10 advisors across three regional offices, but the plans are to add far more, with support staff and infrastructure already in place. The pricing structure will charge $250 for an initial basic plan, $40/month for ongoing access to advice, and will have an AUM option with a 1% management fee for those who wish to move assets to NestWise (although it won’t be required). Advisors who join can either go independent immediately – which allows them to keep a larger portion of their revenue – or select an employee model where they are trained by NestWise and paid a salary. Notably, NestWise is also looking to build out a direct-to-consumer marketing brand to support its advisors, who explicitly sign on under the NestWise platform and brand (not as LPL representatives).

Financial Advisor Technology: 9 Apps to Improve Your Practice – This article from the blog of consultant Craig Iskowitz highlights a panel from the Technology Tools for Today (T3) conference regarding cutting edge tools and applications that advisors can use (and not just based on tablets/mobile devices). For instance, Idea Flight is an app that allows people using their iPads to follow shared PDF documents controlled from a master "pilot" device – which makes it much easier to guide clients through a presentation of a plan, performance report, or other materials, when everyone has their own tablet device (or you can buy a second-generation iPad2 for client use for only about $400!). If the sharing needs are more complex, consider the "ruthlessly simply" screen-sharing website Join.me, or WebEx competitor Fuzebox. The panel also discussed the benefits of going to the cloud, including better maintenance of equipment, better security, and disaster recovery, and even a potential cost savings (although it may be less savings than some imply). In addition, when working with a cloud provider, do some due diligence on the company itself to ensure it won’t go out of business, and consider a backup service like Carbonite to keep a copy of your data just in case. The article also provides some commentary on trends in providers, potential VPN providers, and some thoughts on premium services from LinkedIn.

Independent Advisers Ready To Ramp Up Tech Spending – This article provides a great summary of the 2013 Investment News Advisor Technology Survey. Not surprisingly, the general trend is towards more spending on technology, as 51% expect to increase spending in 2013 compared to 2012, while 41% plan to keep spending level and only 8% plan to cut their tech budget. Notably, though, technology spending is primarily about efficiency, not growth; only 6% of firms indicated that technology was a key way to foster growth, while 43% of firms indicated that productivity was the primary reason for investment. At the same time, most firms struggle to support their technology, as 51% of firms still have nontech staff with other roles handle technology issues as well, and as a result outsourcing of tech support is on the rise. Mobile technology is also popular, with 92% of advisors owning a smartphone (including 60% iPhone, 31% Android) and 63% owning a tablet (of which 84% iPads). Overall, advisors continue to migrate to the cloud as well, with 63% of advisors saying their firm uses some sort of cloud computing.

Obamacare Is Around The Corner – Where Will You Buy Health Insurance And What Will It Cost? – This article by financial planner and doctor Carolyn McClanahan on her Forbes blog provides some nice guidance about how getting health insurance will work beginning in 2014. Coverage will still be available as group insurance through employers, through individual plans, and from public programs such as Medicare and Medicaid. However, large employers (50+ individuals) will be required to provide health insurance, or pay a tax fine; notably, though, the fines are much lower than the cost of coverage, so McClanahan predicts that in the coming years employers will increasingly opt to just pay the penalty, and perhaps a little more to their employees, and step away from offering health insurance. That’s ok, though, because anyone will be able to get health insurance directly through one of the state health insurance exchanges, regardless of health, for comparable coverage and at a comparable cost that can only be adjusted based on age, costs of care in the area, number of family members getting coverage, and tobacco use (but NOT based on health). Individual policies on the state insurance exchanges will become available on October 1, 2013 (and you can even check out early pricing here). However, McClanahan notes that in the end, buying individual coverage will indirectly be a little more expensive than group coverage, because group plans are fully pre-tax while individual coverage has limited deductibility (only amounts in excess of 10% of AGI); in addition, McClanahan notes that overhead costs for individual plans are allowed to be slightly higher than group plans, which may potentially lead to a slight pricing difference in the future.

Wealthy Need New Trust Strategy – On the Financial Planning magazine website, Martin Shenkman looks at how the use of Irreovcable Life Insurance Trusts (ILITs) and other trusts in estate planning are shifting in light of the new rules for portability of the estate tax exemption, and the fact that has been permanently set at $5.25 million (adjusting for inflation). While some clients may still be exposed to state estate taxes, in many states the tax rate (16%) that could be avoided with a bypass trust is lower than the potential capital gains tax (as high as 23.8% or more with state estate taxes) that can be avoided by ditching the bypass trust to get a step-up in basis instead; nonetheless, an ILIT may still be useful to shelter life insurance death benefit proceeds from the need for a (state) bypass trust in the first place. A popular newer approach is the Spousal Lifetime Access Trust (SLAT), which is similar to a bypass trust in that it typically allows for income to be used for the family but growth to occur outside of the family’s estate, but it’s funded not by bequest at death by via a gift while the client is still alive (especially effective for state estate tax planning, given that almost no states have a state gift tax). Shenkman ultimately suggests that the trust of the future will be a "MILIT" – a multipurpose irrevocable life insurance trust – that combines the benefits of owning life insurance, taking SLAT gifts, and achieving bypass trust goals, structuring in a simpler manner without Crummey powers (because the goal really is to get everything out of the estate, especially for those under the $5.25M Federal exemption who are struggling with state estate tax exposure).

Debunking Deceptive Sales Pitches – From the Journal of Financial Planning, this article from Jerry Miccolis and Marina Goodman provides some helpful tips about how to debunk deceptive investment sales pitches that may come to your clients. For instance, one firm boasted of its stock-picking prowess and the results of its picks, but failed to show how it would have worked integrated into a portfolio, where the client either would have had to sell some stocks to buy the next ones (which would have distorted the returns), or held significant cash to allocate to the stocks over time (which would have also dramatically dragged down the returns). Another problem occurs where firms talk about the successful separate account managers they’ve picked, but only highlight the ones they’re still using who performed well, and not the lesser-performing ones who have since been dropped (but did have client dollars in the past). In other situations, firms may talk about returns that are only based on models, which means the ideas were never actually invested in the first place, creating a significant risk that the results are nothing more than after-the-fact data mining. Also beware of cumulative graph returns, which can be significantly distorted by the particular starting point chosen (instead, try to compare rolling returns over time instead to see results in various economic/return environments). Hopefully, by helping to identify inappropriate or outright deceptive investment sales practices, we can collectively help to eliminate their use.

Risk Parity Funds: A Look At Their Complexity, Structure – This Financial Advisor article looks at the rising popularity of risk parity funds, which seek diversification not by just spreading money across asset classes (some of which have more risk than others), but by trying to evenly allocate risk and adjusting the asset classes accordingly (which in practice will reduce allocations to volatile investments and increase allocations to more conservative ones); the basic goal is to be diversified by risk, instead of diversified by dollars. Of course, the caveat is that while adjusting such weightings may improve risk diversification, greater allocations to low-risk investments can reduce return, which risk parity portfolios subsequently resolve with leverage. While many have an aversion to leverage, recent research finds that a leveraged risk-parity portfolio can still generate far better risk-adjusted returns than the mere traditional 60/40 portfolio, which is heavily exposed to the risks associated with equities. Ironically, the research finds that the opportunity for better returns draws directly from the fact that there is aversion to leverage, which makes the market not fully efficient with respect to the strategy in the first place. As the strategies have been succeeding and gaining interest, the two largest have gathered significant assets, with $50 billion in the strategy at Bridgewater (which labeled it the "All Weather" fund as it pre-dates the common use of the term risk parity) and $21.8 billion at AQR Risk Parity Fund (AQRIX); another notable is the Invesco Balanced Risk Allocation Fund (ABRZX). Notwithstanding the apparent benefits, the concerns about leverage, and the risk of forced deleveraging, remain; in addition, many are still concerned that risk parity’s recent success is simply an artifact of the extraordinary bond bull market of recent decades, and that a potential bond bear market would sink the strategy.

Busting The Risk Myth Of Women And Investing – Texas Tech professor Michael Finke writes in Research Magazine about recent studies that find perhaps women are not really less aggressive investors than men after all. The origination of this viewpoint draws from a study by Barber and Odean, who found that men trade more aggressively in their brokerage accounts than women, as well as studies that found women tended to choose safer investments in their employer retirement plans. However, the reality is that women in older cohorts were less likely to go to college, may be less financially literate, and were more likely to have career disruptions to raise family, amongst other factors – which means the reality may be more nuanced than just looking at their investment behaviors alone. For instance, it’s possible that part of the reason women invest more conservatively than men is simply because they have a longer life expectancy, and have a greater concern about running out of money in the first place. In fact, more recent research has found that when risk tolerance of men and women is studied directly, the results between the genders are extremely close, suggesting that external factors may in reality be the driver of almost all the perceived differences in how men and women invest, rather than any biological or hard-wired gender differences. In fact, a recent study found advisors tend to overestimate risk tolerance for male clients and underestimate for women, which means there’s even some concern that women may have less risky portfolios because advisors incorrectly assume they’re more conservative and recommend more conservative portfolios, causing the myth to self-perpetuate! So the bottom line is that while women may still be more risk-averse than men in practice, it’s more likely a reflection of their different personal and family circumstances, education, and other needs… and not a biological trait!

Second Thoughts: Making Better Decisions – In the March issue of Investment Advisor magazine, money psychologist Olivia Mellan looks at how to help clients "De-Stress Decision Making" with a series of "DDM" rules that are focused on not just telling clients to be rational and ignore their emotions, but how to arrive at integrated decisions. Perhaps the easiest tip is simply to recognize that because decision making is weaker under duress, that important decisions should be deferred during high stress times; if decisions have to be made, get them done face-to-face in person (where nonverbal body language can be read as well) and try to create a safe environment where clients can feel comfortable and not judged or rushed. When clients are making irrational decisions, probe deeper to try to understand if/whether there are emotional issues involved that are driving the decision (or indecision), and don’t get off track following client emotional triggers, failing to recognize facial or nonverbal cues, or being distracted by your own emotional triggers. Also, recognize that not all clients process information the same – some learn verbally, others pictorially, and still others kinesthetically. And recognize the power of storytelling, both to help explain concepts and persuade clients on issues, and also for clients to communicate and reveal what really matters to them.

My Secrets: How I Became a Prolific Writer and Learned to Get Beyond School Essays – This LinkedIn article from Vivek Wadhwa tells his interesting personal story of how, as an entrepreneur and prolific writer, he has managed to succeed from his roots as someone who has no journalism degree, has never taken writing classes, and barely passed English in grade school because he disliked grammar. The key, Wadhwa notes, is to speak fearlessly from the heart, get to the point quickly, keep the message simple and focused, and use the fewest words possible; in other words, to eschew entirely the formal writing structures you may have originally learned in school. Wadhwa also notes that it’s very beneficial to have a good editor – if you’re not strong on grammar, get your writing reviewed by someone who is (or at least a good friend who is grammar savvy!), who can help to clean it up a bit! Ultimately, writing may be slow initially, but it gets faster and easier with practice… just like anything else!

10 Things Really Amazing Employees Do – From Inc, this article provides some nice tips about what makes a really special, amazing employee, including: really enthusiastically learning all aspects of the business; being a steward of the company that treats it like it’s their own; helping to generate viable growth opportunities; resolving issues before they become real issues; talking straight and telling it like it is (but do so diplomatically!); demonstrate high standards; grow themselves through personal development; research and figure out solutions; try to maintain a happy work environment that’s positive and productivity for everyone; and have a positive give-and-take between employees and bosses. Whether you’re a boss or owner of a company, or an employee, these are good reminders for everyone!